I've written about Brazil pre-Lula and post-Lula and spent the last five years covering all aspects of the country for Dow Jones, Wall Street Journal and Barron's. Meanwhile, for an undetermined amount of time, and with a little help from my friends, I will be parachuting primarily into Brazil, Russia, India and China. But will also be on the look out for interesting business stories and investing ideas throughout the emerging markets.

Picks And Pans Of A $40 Bln Fund Strategist

At some point, emerging markets are going to make a comeback after a year of dire straits. I spoke with Marc Tommasi, the head of global investment strategy at Manning & Napier in Rochester, New York. Manning runs $42.4 billion of client money, both retail and institutional. We spoke pre-QEIII. I’ve spoken with Marc a number of times, both for Forbes and when I was with Dow Jones and the WSJ in São Paulo. Marc, like others in the business, was convinced QE was coming and he was right. Here’s some of his picks and pans in this excerpted transcript for those interested in international investing from both a top down and a bottom up perspective.

Marc Tommasi: We’ve been taking a concentrated effort to avoid value traps. Rather than just take a passive approach, we are looking at individual equities. We’ve been at this now for forty years and our strategies do all right over time in avoiding those holes. We start with the business, then pull in some of the macro data to see what that might mean for the top line of that particular company. We’re not just saying, hey, China is trading at historically low multiples, lets buy the market.

Kenneth Rapoza: Last year was a mess for emerging markets because of inflation. This year has been a mixed bag and everyone blames the core economies. Those are economies are still weak, so it might go without saying that EM will continue to underperform the S&P 500, no?

MT: Emerging’s traditional customers are all pretty weak, but given some monetary and fiscal stimulus in places like Brazil and China and India is due, our take is that these economies will start to pick up. Not great, but they are positioned to do better into the fourth quarter.

KR: People have been really wrong on EM short-term.

MT: Yeah. EM is still not playing out the way we expected it. I still think China is behind the curve because of easing and they’ll have to get more aggressive in the near term.

KR: Even so, emerging’s growth trajectory is way better than the core economies. Gotta be. You just have to think a little beyond next week.

MT: The secular growth story for emerging markets is still a lot healthier than developed markets, absolutely. The underperformance is mostly due to developed nations. The U.S., U.K., Europe and Japan are not likely to ever grow rapidly again. We’re still looking at a few more years of deleveraging being a main theme there, impeding growth because government’s will hire less, spend less and many corporations are in the same boat. But in emerging, there are just many more growth factors to consider. We’re not saying that EM will grow at historic levels, but they’ll get better than they’ve been recently.

KR: You’re not a China hater? What’s wrong with you?

MT: No, I’m not. I know a lot of people think that China has played out its fixed asset investment story. But I think that if you travel across China you will see there is plenty more they can do with infrastructure.

KR: What’s your take on China?

MT: The third quarter might not have been as good as we had hoped. If not, then the fourth quarter will be better than the third. We are counting on more stimulus and think that 7.5 percent GDP is a fairly easy target for them to hit. That’s what investors should expect. We have a new administration coming in November. I don’t see things getting worse there, let’s put it that way.

KR:Barclays says they expect stabilization now. Not deterioration. What are you buying?

MT: We’re sticking with the consumption story in China. It’s not the cheapest sector, though. We like Mindray Medical (MR). They have a good combination of external and internal demand dynamics going for them. Still a fan of Tencent and we think you look at the big multinationals that have a foothold in China and get a large portion of their revenue from China. Stay away from bank and real estate for now.

KR: What’s your take on Mexico? It was everyone’s little darling this year. I even had senior level Brazilian strategists from Itau in São Paulo telling me Mexico was better than Brazil.

MT: We’re constructive on it. Like the idea of manufacturing returning to Mexico. If you get reforms on foreign capital to the energy sector that will bring in more money to the oil industry and that will help government finances. We think there’s a lot there to play out, still. Hard to justify as a buy right now.

KR: That inevitably brings us to Brazil. It’s been surprisingly ho-hum this year. Nothing they do seems to go right. A big pause there.

MT: We’ve been reducing our position in Brazil. It’s been a decade long story and we have seen a massive improvement in their economy. But (President Dilma) Rousseff has let the fiscal discipline slip a bit. At the margin, it’s a little disconcerting. No real direction for a while there, with new taxes being added all the time to save the currency, then you have taxes being cut. Then you have China slowing down. That’s surely not helping them.

KR: Besides the macro, what about on the ground. There’s got to be something good in Brazil. I know the majors like Petrobras (PBR) and Vale (VALE) have been duds.

MT: We like Natura (NATU3). We own it. And we got back into Petrobras actually when it was in the teens. The private education company Anhanguera (AEDU3), we own them.

KR: India’s been another disappointment. Where are you guys doing in that market?

MT: Lots of changes have to be made in India. Lots of pesky problems with infrastructure and their reliance on foreign capital to fund government deficits and then there’s corruption. We’re back and forth on it. A month or two ago we said, ‘you know what, forget it’.

KR: I can’t imagine Russia being in any better a position, then, if you are concerned about politics and corruption.

MT: We are not enamored at all, even with oil where it was and might go into the first quarter of 2013. Again, the powers that be run roughshod over the rule of law. We just don’t have a lot of faith in Russia. And then, of course, the bulk of the liquidity in that market is oil and natural resources which you can get exposure to elsewhere. Not as cheap, but not as risky either. We manage a mutual fund that holds two Russian internet names, Mail.ru and Yandex (YNDX).

KR: What countries outside of the U.S. and Europe are you warming up to over at Manning & Napier?

MT: I’d say definitely Poland, Czech Republic, Korea. Indonesia, too.

KR: What’s your expectation going into the fourth quarter now?

MT: Developed markets will be a challenge and emerging market equity will still to look attractive. I’d take equity over fixed income in these markets. We are not counting on overall economic activity to drive the business. We are looking for hurdle rates, really. Industry shake outs. As long as you are invested in the better balance sheets and the better managed and larger companies, they will do well when the weaker competition falls by the wayside in this environment. It’s a challenging environment, but hey, it’s an environment nonetheless and you got to do something with it.

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